PART A: Outline the main features of a cross-currency swap. Include in your answer a discussion of the differences between an interest rate swap and a cross-currency swap. Briefly discuss the new risk (not usually associated with interest rate swap) introduced by cross currency swap. [3 marks]

PART B: Aussie-Akubra is a US-based subsidiary of an Australian company. A large part of its business is located in the USA and derives its income in USD. Lincoln-USA is a subsidiary of a US company based in Australia. It derives its income in AUD. Both subsidiaries have decided to finance an expansion of their operations in the US and Australia respectively with debt issues but are concerned with being exposed to foreign exchange risk.

PART C: Explain how both subsidiaries can use a cross-currency swap to avoid exposure to foreign exchange risk. In your answer, discuss whether or not the currency-swap would result to a perfect hedge. [4 marks]